Capitalism, Creative Destruction, and the 2012 Election


In his 1942 book Capitalism, Socialism and Democracy, the Austrian-born economist Joseph Schumpeter famously likened the capitalist system to a "perennial gale of creative destruction." Capitalism, Schumpeter wrote, "is by nature a form or method of economic change and not only never is but never can be stationary." This dynamic process, he argued, "incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Joseph Schumpeter

It was a powerful observation then, and it remains no less relevant to our world today, as the French economist Guy Sorman illustrates in an engaging essay entitled "Schumpeter in the White House" appearing in the latest issue of City Journal. As Sorman observes:

Schumpeter believed that progress in a capitalist economy requires that the old give way constantly to the new: production technologies in a free economy improve constantly, and new products and services are always on offer. But this creative transformation also has a destructive side, since it makes earlier products and services—and the workers who provided them—obsolete. Today's consumers have little reason to buy an oil lamp instead of a lightbulb, or a Sony Walkman instead of an iPod—which can be bad news for the people who manufacture the oil lamp and the Walkman.

Looking back at the history of Western capitalism, we can see how the discovery of new energy sources, new communications systems, and new financial instruments regularly demolished old ways of doing things. When this happened, the result was typically short-term pain, as certain workers found themselves displaced, and sometimes even what appeared to be economic crises; but there was also substantial long-term gain, as the economy became more efficient and productive.

When it comes to explaining Schumpeter and his ideas, Sorman's essay is a great resource. But Sorman stands on shakier ground when he turns his attention to the 2012 U.S. presidential election, which he frames as a partial referendum on Schumpeterian economics. Here's Sorman again:

The 2012 presidential race will be, in part, a showdown between two different models of economic growth. President Barack Obama and his Democratic administration will defend the once-discredited and now-resurgent theory that government must act as the economy's "tutor" and use public funds to stimulate it. The Republican nominee, presumably Mitt Romney, will advance the free-market argument that the main source of new growth is the innovative energy of American entrepreneurs and that government needs to get out of the way.

It's nice to imagine a major party presidential candidate advancing a genuine free-market agenda rooted in the idea of creative destruction—but where's the evidence that this unlikely event will actually occur this calendar year? Sure, Romney and other Republicans will mouth the usual pro-capitalist platitudes, but as my colleague Peter Suderman observed yesterday, "As for gutting government, Republican legislators may talk a big game about federal spending, but that doesn't mean they vote accordingly." And let's not forget that Republican President George W. Bush also used public funds to stimulate the economy. Regardless of how the 2012 election turns out, I'm afraid we won't be seeing Schumpeter in the White House anytime soon.